But, who recapitalises the banks is a huge issue. Given the likelihood that there are still a lot of losses that have not yet been recognised, a capital injection into the Spanish banks directly from the EFSF/ESM would be a boon for Spanish taxpayers. Future losses would be absorbed by the area wide taxpayer.

It should be remembered that it was only two weeks ago that the Spanish finance minister, Luis de Guindos, said that €15bn was all that would be needed to shore up the entire banking system. Given the state of Spanish government finances you would wonder exactly where the Spanish government is expected to find this additional €19 billion. How about a reverse LTRO?

Santander UK, the British arm of Spain’s biggest bank by market value, has been forced to stress its independence from its parent, amid heightened nervousness about the vulnerability of the Spanish economy.

A country like Spain or Italy could conceivably enter a financing programme pre-emptively, taking it off the markets before turbulence from a Greek exit struck. But that would simply raise questions about how much ammunition Europe had left to cope with another country in distress. That leaves the banks. Another burst of liquidity for the banks, an LTRO 3, would provide Spanish and Italian banks with the funds to keep on buying up sovereign bonds. But the cost, for Spain in particular, would be a further deepening of the ties between banks and sovereigns. A better answer for Spain, especially at a time when lenders would be facing more losses on their remaining Greek exposures, would be for Europe to provide substantial funds to recapitalise weak lenders. It would be best if that could be done directly via the block’s rescue funds, so that money did not have to funnelled via governments, thereby raising the spectre of subordination for existing sovereign creditors. The problem is that direct recapitalisation is not currently allowed. If policymakers could rouse themselves to sort that out, they might also consider allowing the rescue funds to act as deposit-guarantee funds, helping to persuade depositors in vulnerable countries to keep their money at home.